Paul Krugman’s Cure For Economic Woe: An Alien Invasion

According to Paul Krugman, what the American economy needs is for a bunch of space aliens to invade us.

After watching this video, I’m beginning to wonder if the Nobel Committee might not want to reconsider giving Mr. Krguman an award:

Fareed Zakaria: Wouldn’t John Maynard Keynes say that if you could employ people to dig a ditch and then fill it up again, that’s fine, they’re being productively employed, they pay taxes, so maybe Boston’s Big Dig was just fine after all.

Paul Krugman: Think about WWII, right? That was not, that was actually negative social product spending, and yet it brought us out [of the Depression]. I mean partly because you want to put these things together, you say, ‘Look, we could use some inflation,’ Ken and I are both saying that, which is of course anathema to a lot of people in Washington, but it’s in fact what the basic logic says.

It’s very hard to get inflation in a depressed economy, but if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So that if you think about using all of these things together, you could accomplish a great deal.

If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.

And then if we discovered, ‘Whoops! We made a mistake. There aren’t actually any space aliens,’ we’d be in better —

Ken Rogoff: So we need Orson Welles is what you’re saying.

Paul Krugman: No. There was a Twilight Zone episode like this, in which scientists fake an alien threat in order to achieve world peace. Well, this time we don’t need it [to achieve world peace]; we need it in order to get some fiscal stimulus.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

(…)

Guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficit

That wasn’t the first time that Krguman had made the “economic growth from destruction” argument. Only three days after the September 11th attacks, he wrote this:

[T]he direct economic impact of the attacks will probably not be that bad. And there will, potentially, be two favorable effects.

First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.

What Krugman’s World War II analysis left out, of course, is the fact that the United States was the only major industrialized nation on the planet that had not been nearly or completely destroyed by the devastation of a six year long war. During the war, most of our investment involved creating things that blew other things up, or creating the vessels that transported the things that blew things up. There was no economic value in either of these things in a post-war world. Moreover, Krugman’s analysis completely leaves out the tremendous economic cost of the war itself. This includes not only the raw cost of the war itself, but also the capital equipment lost, the human capital lost, and the cost of investment diverted from normal economic activities to wartime production by government fiat. The same analysis applies to the September 11th attacks. Destroying the towers did not create wealth, it destroyed wealth.

Krugman makes the same mistake with regard to this hypothetical alien invasion, or the “Twilight Zone” scenario (which was actually an episode of The Outer Limitsit turns out) where the world is deceived into believing that such a threat exists “for its own good.” Expending vast amounts of resources to prepare for an alien attack that never happens wouldn’t create wealth, it would merely waste vast amounts of resources. If it turned out that there was a real alien invasion and we were forced to rebuild a devastated Earth post-war, we would just be living in a post-WW2 scenario writ large, not creating vast new sources of wealth.

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Destruction doesn’t create wealth, it destroys wealth, and make-work projects like the ones that Zakaria and Krugman talk about in the video above aren’t going to bring this economy back.

Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts.

Catfish, he did not say it was good, he said it can be a good (have positive impacts) Big difference. And if you knew anything about economics (and this is about all I know) a moderate rate of inflation, say 2-3%, is good healthy, Deflation on the other hand, is never good healthy.

What Krugman’s World War II analysis left out, of course, is the fact that the United States was the only major industrialized nation on the planet that had not been nearly or completely destroyed by the devastation of a six year long war.

I’d say that that’s not correct at all.

England’s industrial might was not “destroyed” during the war, but England’s economy suffered greatly in the postwar era.

The Soviets moved much of their manufacturing base to the Ural Mountains, well beyond the furthest reach of the Germans, and were making scores of tanks and self-propelled guns (while using our much-superior trucks, of course).

What America did was unprecedented–we transformed ourselves from a wartime economy to a peacetime economy and found a way to make things people wanted to buy. The English and the Soviets? Nope. Japan and Germany caught up to us, but the essential argument is, we figured out how to make things people wanted to buy. That’s why our economy took off.

Destruction most certainly does create wealth. Germany and Japan were utterly destroyed–the old orders were swept away, leaving new institutions to rise in their place. Their wealth now exceeds that of Russia, which is today the real historical victim of World War Ii precisely because the Soviet system survived the war. How’d you like to be a pension-starved Russian veteran of the Second World War, knowing full well that the Germans who knuckled under and gave up now live in wealth and security?

Mr Mataconis, it must be very dreary living in your house where exaggeration and silly examples to illustrate opinions are out of order and every argument must be matched carefully to it’s cause. Don’t you remember that even the Great Ronald Reagan used a similar thought: “…what if all of us in the world discovered that we were threatened by an outer — a power from outer space, another planet? Wouldn’t we all of a sudden find that we didn’t have any differences between us at all, that we were all human beings, citizens of the world, and wouldn’t we all come together to fight that particular threat?” http://j_kidd.tripod.com/b44.html

And did you really really think that Mr Krugman is happy that at least 20 million persons died in WWII? That he celebrates the flattening of entire continents?

But the thing is, at least in regards to the alien invasion argument (or even the WII example) he isn’t talking about the broken window fallacy. He is talking about stimulus.

Consider: where is the destruction in the alien invader example?

Consider: where was the destruction in the US in WWII?

The point in both cases is a boatload of deficit-financed stimulus into the US economy without* the actual destruction. Indeed, his Outer Limits ref is about a fake invasion so there isn’t even any real threat of destruction, but a lot of building.

Taking an obvious analogy at face value ducks the central question, which is why don’t we rebuild America?

I have never understood why conservatives want to engage in nation-building in countries in central Asia, but become completely unhinged at the thought that maybe we might consider building new schools, roads, airports, and rail lines in this country.

The post WWII environment saw two things which are not in evidence today: A manufacturing sector that had just seen several years of investment and a consumer sector that had seen two decades of austerity. That’s a powerful mix for growth and one that we can’t replicate today.

Prof. Taylor, I see your point, but I don’t think there is any real difference between money spent to repair destruction and money spent to avoid destruction. You just need to tweak the broken window fallacy to imagine that society has created a class of spoiled hooligans intent on breaking windows and in order to thwart them the government creates a police force dedicated to stopping them. The police force = the window repairman.

Wouldn’t society be better off if the hooligans did not exist in the first place, irregardless of the multiplier effect of increased government expenditures to thwart them?

Forgot for a minute whether one agrees with the idea, but the whole point of Krugman’s alien example is that, ultimately, there are no hooligans.

And this isn’t about police (which would be worthless against alien invaders in the first place), it is about massive industrial stimulus funded by the government (something Krugman has argued for endlessly, aliens or no).

I am not trying, btw, to defend the position one way or another—I just think people ought to at least understand the point of what he is saying before criticizing or agreeing with it.

It’s not a matter of breaking windows so that someone will get paid to fix them. There are plenty of broken windows already. Paying someone to fix them both increases economic activity, and results in less drafty buildings.

I’m sure we all realize Krugman isn’t hoping for an alien invasion, he’s simply using it as a metaphor for policies which can end the current depression. That seems very obvious from the emboldened text.

“If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and really inflation and budget deficits took secondary place to that…And then if we discovered, ‘Whoops! We made a mistake. There aren’t actually any space aliens”

@PD Shaw: We don’t need to wish for bad things to happen; there is plenty of infrastructure that needs to be repaired, updated, replaced, or added. It will all take deficit financing to accomplish–in much the same way, to drag out that tired old meme, that most of us don’t pay cash for our houses, we borrow money for them.

It really reminds me of the roaring 20’s and then we had a depression. And under Bush, it looked like the roaring 20’s and today we cannot get out of our slump. Many bad assumptions were going on at the same time that made no sense. I cannot come up with them all, but I can tell you, that it made no sense for the president to come to my state in 2004 and said “free trade is good” and we watched the factories close up. And all I saw was our jobs leaving the country, our money going to Iraq, and the neglect of our infrastructure. In a million years, this would make no sense.

Also, at the same time, our country was targeting housing for jobs, while ignoring the loss of jobs in manufacturing.

And then, as always, and even today, forecasts for higher growth are mentioned and that did not make any sense.

But overall, as I watch the analysts and guests on C-span, along with democrats and republicans, they still keep believing in their free trade as we still keep sending jobs overseas. Now, they say, we will benefit, yeah, maybe CAT, John Deere, and Boeing, but what about all the other industries? And what about towns across the country who rely on manufacturing?

How can an economist like Veronique De Rugy, of George Mason Univ., say that it was okay to lose our jobs and that we had Wal Mart jobs to go to. And you here the same garbage across the spectrum. And an analyst today on C-span that we will be trading more. But how do you trade more with 1/3 less factories? And then he says if we lower the corporate tax rate, that these companies will invest in their companies. But of course, he left out, is that investment will be robots and less jobs.

Yes, what got us out of the Great Depression was first the war, but then the factories changed to making products and people had jobs. Today, after a decade, we lost some 57,000 factories and some 6 million jobs. And on top of that, we had a president who used tax cuts as an ideology, that would solve all our problems, and just “stay the course.” Yeah, we saw the roaring 20’s under Bush and now we have no jobs and we lost all stimulus. We now see what Roosevelt was up against.

The fact remains, as communism fell, we have added 2 billion cheap laborers to the free market system and they want jobs just as much as we do. This is what we had not had to contend with with our years of dominance in manufacturing. And you can add automation and more loss of jobs, lean principles and more loss of jobs, and mergers and consolidation and more loss of jobs.

The only solution that I see, outside of the cutting of programs that are going broke, is that we have to invest in our country, in our people, and in the future.

Invest in the country: Infrastructure, high speed internet, a new air traffic control system that will reduce fuel by 12%, etc.

Invest in the people: Mandatory vocational training to all as we face globalization.

Invest in the future: That is federal research grants and the like to fund research. This will create new areas of jobs for the private economy.

Bottom line. It is almost too late to recover anything we had. We gave up over 6 million jobs and that is not even on the radar of the politicians. They have no idea what will replace those 57,000 factories that closed over a decade. But as Roosevelt was confronted with this situation, you do everything you can to prevent a depression as that is something we don’t want to see. It is unfortunate, as they stick to their free trade and sending jobs overseas, the democrats will keep spending, the republicans will say it is more tax cuts, and the fed will keep on printing. And they will keep believing we will export more with 1/3 less manufacturing.

My understanding of Krugman’s comment was that he believes we need an enormous stimulus, which nobody in government wants to do. But if we faced a big enough threat, both parties would have no problem spending whatever it takes and beyond, debt be damned.

@Scott O.: That’s just not fair. Instead of pretending that Krugman meant his deliberately asburd metaphor to be taken literally, you listened to what he was actually saying. They’ll never let you be a Libertarian pundit that way.

Can you think of any other way that would trigger a majority, or even a sizeable number, of Republicans to agree to stimulus spending?

My understanding of Krugman’s comment was that he believes we need an enormous stimulus, which nobody in government wants to do. But if we faced a big enough threat, both parties would have no problem spending whatever it takes and beyond, debt be damned.

Bingo! Now, why do people like Doug not see this…

It’s funny that neocons and their fellow travelers didn’t seem to mind spending gobs of money on infrastructure in Iraq, but we absolutely can’t do that here…now, why is that? I guess there can be a few possible explanations…

@Ben Wolf: “You think he’s trying to trick us into believing aliens are about to invade?”

No, I think that detail is important to some other people in this thread. I don’t think it matters whether we wish for alien invasion or whether we wish for the free hand that a fake invasion would give the government. In either case, its premised on a fallacy that economic growth can be premised on wishing or creating costs.

How about this: I wish there was the political unity to borrow money in order to dig holes in the ground and then have them filled in.

@PD Shaw: The answer to your question is yes, though minimally, as money spent in modern wars is mostly captured by the corporate benefactors of the conflict and channeled to the wealthy where it is mis-allocated.

@PD Shaw: We don’t have to wish for stuff to spend on. That isn’t Krugman’s point. There are plenty of things that need work now and in the near future, that we aren’t doing because we have fallen for the canard that all spending outside military expenses = bad.

Doug–despite the headline, I’m sure you understand that Paul Krugman is not actually wishing for an alien invasion. However, in bringing up Bastiat you show you did entirely miss his real point. He’s not arguing that destruction creates wealth. He is arguing that were some overriding disaster to overcome our aversion to deficit and inflation, we would do what we need to do to grow the economy. So why don’t we just skip the disaster, set aside our aversions , and do what needs to be done?

If we can’t bring ourselves to do the right things without an external threat, we don’t need space aliens. We have the very real threats of dependence on dwindling foreign oil and global warming.

Krguman’s been arguing for some time that we need more economic stimulus, ala what was done in the GP and then to an even greater extent in WWII, to get out of this slump.

The trouble with that, I think, is that in order for it to work we’d need to mimic other things that happened during that time (and I’m not at all sure we can mimic those things in 2011*). I think Krugman is aware of such objections but downplays them because he’s convinced this is a relatively simple demand problem and is engaged in a rhetorical battle with people who appear to fundamentally reject that idea.

Seems to me that in order for consumer demand to pick back up and stay up, household debt loads need to be reduced. In WWII, the government basically hired everybody and rationed consumption. Meanwhile, competing economies were destroyed or badly damaged, and several other wealthy nations racked up a bunch of debt buying war materials from us.

So we came out of the war with lots of governmental debt, sure, but private debt loads were significantly lower than they’d been before and so when we switched over from guns to butter people could buy the butter. Add in the fact that a whole lot of workers were stuck behind the Iron Curtain and therefore removed from the market economy, well, I just don’t think we can get there from here. Now all those workers are part of the global economy. We no longer have ~50% of the world’s manufacturing capacity. Household debt is high. And, despite the frantic efforts of NeoCons and/or Liberal Interventionists to conjure one up, there is no Hitler around at the moment (for which we can all be thankful). And, contrary to the delusions of the Right, Krugman doesn’t want another Hitler. He wants to muster up the political will to act that we’ve only ever mustered in the face of threats like Hitler. He’s not gonna get it.

I think Krugman’s right about many things, but I think his preferred policies would at best work about as well as FDRs did in the 30s, because it takes time for households to de-leverage. Things improved in the 30s, but were still pretty bad even before the 1937-8 recession and again on the eve of our entry into WWII. Better that than a deflationary spiral, sure! But it’s a so-so solution at best.

I worry very much about the preferred policies of the anti-Keynesians, because I think they’ll make things worse, but I don’t think Krugman’s got it quite right either. But then I’m not an economist – I majored in History with some econ courses thrown in.

* – Krugman has also been arguing that some moderate inflation would be good. This is an attempt to tackle household debt indirectly.

What Krugman does is assess the evidence and then prescribe a policy solution. The solution itself may not be politically possible, and he is aware of that. But that doesn’t mean that we should not know what the best policy solutions are to begin with.

@Rob in CT: I think he’s right overall, but the specifics of achieving a sustainable level of consumption are elusive. WWII was the catalyst that brought women into the workforce en masse. Before, they were an underutilized resource. The conditions to achieve a self-sustaining recovery are tricky because we have outsourced manufacturing.

The true problem is the loss of manufacturing jobs, and our inability or lack of will to innovate in jobs that cannot be exported (see, e.g., green energy).

Disregarding whether it is good economic policy or not, I feel like it is evident that the analogy between what Prof. Krugman is suggesting and the Bastiat quote is faulty. As Dr. Taylor pointed out there is no destruction of the “window”, but further it is obvious that this increased federal spending would be deficit spending (or borrowed money) and therefore it is not as if we would have spent the money on something else as is suggested by Bastiat’s example.